Be careful of FDI-driven growth


As we mark 100 days of the Pakatan governments in office, it has become fashionable to measure their success by the amount of foreign direct investment (FDI) they have succeeded in drawing in.

Everything seems to revolve around FDI. So that even the decision to build a RM5 billion second road bridge in Penang hinges on what the almighty foreign investor thinks and not what sustainable transport planners consider appropriate.

In short, state governments are rapidly becoming servants of Big Capital and Big Business, mere tools to serve and facilitate their interests.  FDI is seen as the prime mover of the economy. In the process, sustainable development especially environmental concerns, local businesses and workers’ rights take a back seat.  What has been the level of technology transfer after some four decades of promoting the electronics industry? As the experience of Latin America suggests, we would do well to proceed with extreme caution in dealing with FDI.

This extract is from a piece published by Third World Network in Penang:

South-North Development Monitor (SUNS) #6496, 16 June 2008

Finance: Limited impact of FDI on economic growth in Latin America

Geneva, 13 Jun (Kanaga Raja) — With some exceptions, foreign investment has fallen far short of stimulating broad-based economic growth and environmental protection in Latin America, according to a report by the Working Group on Development and Environment in the Americas.

Working Group co-chair Prof Gallagher said: “The story of foreign investment in Latin America has been one step forward, two steps back. A handful of countries in the region were able to attract unprecedented amounts of FDI, but it wiped out local firms and accentuated environmental degradation as well.”

“Investment liberalization of course, has been part of a larger effort broadly referred to as the Washington Consensus,” said the report.

The broader reforms include a package of economic policies that promote economic development by opening national economies to global market forces. Over the last twenty years, governments throughout Latin America have reduced tariffs and subsidies, eliminated barriers to foreign investment, restored fiscal discipline by reducing government spending, and have generally reduced the role of the state in all aspects of the economy.

The promise, among others, of following these policies is that FDI by multinational corporations will flow to and be a source of dynamic growth in host countries. Beyond boosting income and employment, the hope was that manufacturing FDI would bring knowledge spillovers that would build the skill and technological capacities of local firms, catalysing broad-based economic growth; and environmental spillovers that would mitigate the domestic ecological impacts of industrial transformation, said the report.

“These policies and agreements have raised concerns, in part because they have shown poor results.

Economic growth in per capita terms in the region was slower
– less than 2% since 1990, the period of the reforms, than in the last decades of the import substitution period.”

“A major finding is that slow growth is in part explained by the fact that FDI failed to crowd in more total investment into Latin American economies,” said the report.

According to the Working Group, among the main findings of the report are:

— FDI was concentrated in a small handful of countries in the region. Indeed, Brazil, Mexico, Argentina, Chile and Venezuela received more than 80% of all the FDI in the region;

— Foreign firms by-and-large located in Mexico and the Caribbean tended to serve as export platforms to the United States, whereas those located in South America did so to sell to domestic markets in that region;

— FDI was attracted by traditional determinants, not necessarily whether a nation has a regional or bi-lateral trade and/or investment treaty or if it can serve as a pollution haven for foreign firms;

— When FDI did come, foreign firms tend to have higher levels of productivity and higher wages and were likely to increase trade in the region; yet FDI fell far short of generating “spillovers” and backward linkages that help countries develop, and in many cases wiped out locally competing firms thereby “crowding out” domestic investment;

— The environmental performance of foreign firms was mixed, sometimes leading to upgrading of environmental performance, and in others performing the same or worse than domestic counterparts.

The Working Group studies documented and analysed the track record in specific countries and sectors.

In Brazil, Argentina, Mexico (three countries that have received the lion’s share of FDI in the region) and Costa Rica, it was found that foreign firms have higher wages, productivity and trade vis-a-vis domestic firms; linkages with national firms and the domestic economy in general are weak, especially in Mexico and Costa Rica; although foreign firms may bring the technologies generated in their headquarters, they do not contribute to an increase in R&D expenditures in the host economies.

Moreover, in Brazil, Mexico, Chile, and Argentina:

— Virtually all foreign firms transferred environmental management systems to host countries;

— However, it is not clear that such firms were actually in compliance with host country laws and in Brazil there is little indication that foreign firms were more likely to be in compliance than domestic firms were;

— There is little evidence that foreign firms are greening their supply chains (given that so many supply chains were wiped out from FDI in the first place);

— In some instances such as the forestry sector in Chile, foreign firms that exported through fair trade certification schemes were “upgrading” to higher levels of environmental standards; and

— In others, such as in Mexico’s electronics sector, foreign firms were not exporting to meet strong standards in Europe given that their chief export market, the United States, does not have such standards.

The Working Group, in agreement with the broader literature on the subject, found that investment regime liberalization-led FDI has had at best a limited success in Latin American countries.

The report said that it comes as no surprise to find that virtually all newly elected governments in Latin America are rethinking the role of FDI in their economies. “While some countries are simply at the stage of starting to debate the issue, others are going so far as to nationalize foreign firms. Yet, most governments are looking for a more balanced approach.”

The Working Group argued that what the report makes clear is that new policies are needed. It said that three broad lessons can be drawn out as principles for policy-making in this field:

1. FDI is not an end but a means to sustainable development. Simply attracting FDI is not enough to generate economic growth in an environmentally sustainable manner.

The report showed that even in the nations that received the lion’s share of FDI in the region – Brazil, Argentina, and Mexico – FDI fell short of generating spillovers and sustained economic growth. FDI needs to be part of a comprehensive development strategy aimed at raising the standards of living of the nation’s population with minimal damage to the environment.

2. FDI policy needs to be conducted in parallel with significant and targeted domestic policies that upgrade the capabilities of national firms and provide a benchmark of environmental protection.

There are numerous country-specific policies that are either being implemented or debated regarding ways in which LAC (Latin American and Caribbean) nations can overcome information and coordination externalities, access to credit problems, and competitiveness issues on the part of their domestic firms.

In this regard, parallels or lessons from Asia may be drawn, since many nations in that region have put in place targeted industrial policies to link domestic firms to foreign firms to the extent that the domestic firms develop into competitive exporters themselves.

3. International agreements, whether at the WTO or at the level of regional or bi-lateral trade and/or investment treaties (RBTIAs), need to leave developing nations the “policy space” to pursue the domestic policies necessary to foster sustainable development through FDI.

“The emerging international regime of international investment rules is restricting the ability of developing nations to pursue some of the policy instruments that have been successful at channelling FDI for development in Asia and elsewhere.”…

Please help to support this blog if you can.

Read the commenting guidlelines for this blog.
Notify of

Most Voted
Newest Oldest
Inline Feedbacks
View all comments
19 Jun 2008 12.17am

Some of my thoughts about FDIs.

we need FDIs to generate employment. but priority should be given to locals and east malaysians.
we need FDIs to spur economic activities through tricke effects like developing SMIs through sub-contracting.
we need FDI to earn foreign exchange (exports). beware of capital repatriation.
we need FDIs to facilitate technology transfer. Who is monitoring and enforcing?
FDIs are shorterm in nature.
FDIs are flavour of the day in the 100th day.

18 Jun 2008 1.29pm

No FDI = No factory = No jobs = No money

18 Jun 2008 10.28am

FDI is needed as it is the main reason so many malaysian got their jobs. Besides that, it also promote local business or services that support the foreign investor. For example, A Semicon factory need equipments and workers. That will attribute to the raise of income of individuals and local business opportunity. For the idea of destroying the local business is really none existant. As I don’t see anyone can create a Local Business on Semicond as we don’t have the capital unless it is servicing or providing equiment to the large overseas multinational corporation. But if you are refering… Read more »

18 Jun 2008 10.22am

“Our problem that is that for 50 years we failed to hold the BN coalition and Govt accountable for its doctrinaire policies and its indiscriminate implementation of the NEP resulting in abject racial polarisation and endemic corruption, until we took hold of our senses on 8th March 2008.

And we want to whip DAP & PKR into shape after 100 days? Come on! Get real!!”

donplaypuks, well said.

raj raman666
raj raman666
18 Jun 2008 6.35am

thinking hard anil whether this subject is my breat and butter.

1.definetly need FDI.
But more pysical kind like starting a manufacturing plant.

for who polute the enviroments,hit and run hedge fund.

rajraman-the capitalist.

18 Jun 2008 1.45am

Dear Anil As you note FDI’s are double-edged swords. Nations with foreign exchange restrictions, however limited, are viewed with suspicion by trillion $ capital-base hedge and pension funds as well as Global investment and merchant banks. And here we must differentiate between most of these FDI’s which focus on the stock and property markets and others. They are not interested in much beyond ratcheting up prices in these sectors as quickly as they can and then dumping the stocks and properties like a stone. I also suspect that most of the easy oil-money FDI’s from the Middle East and oension… Read more »

18 Jun 2008 1.26am

Dear Anil We cannot seem to get away from our obsession with this ‘100 days’ performance review, which is really a concept imported from USA. It is interestingto note that if JFK had been held accountable for his place in history on his performance during his 1st 100 days as USA President, he might well have been legally hung by his own Democratic Party! It was Communist Russia which came up with 5-year Economic Programme blocks & cycles as opposed to the year to year planning which until Lenin, was what the West called long-term planning! The person who then… Read more »

Hasbullah Pit
18 Jun 2008 12.02am

FDI boleh menjana kemajuan, tetapi hanya sesuai untuk negara membangun.